Friday 29th June 2001
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Luke Moriarty: On Capstone, we simply could not see the value that some analysts placed on the stock, and elected to sell at just over US$31 per share. It is always arguable as to what price is fair value, but one thing is for sure - you can never pick the exact top or bottom of a share price until after the event! Judging by today's Capstone share price of around US21 per share, it looks as though we did the right thing for shareholders by selling our final tranche at US$31.
The company has announced an intention to return NZ$60 million to shareholders by way of share buy-back. The exact mechanism is still to be announced. The logic here is quite simple - it is a focus on shareholder value - and in a situation where, prior to our announcement of the buy-back, our share price was trading at a discount to NTA of some 30%, our best investment for shareholders must be to buy-back our own shares.
Luke Moriarty: No - the sale of Challenge! has completed our exit of the fuel sector assets that Rubicon acquired from Fletcher Challenge Energy as part of the Fetcher Challenge group separation in March of this year. The disposal process has of course been a great value-success for shareholders - we sold the Brisbane and Challenge businesses for NZ$73 million, which compares with a combined acquisition cost of only $20 million - i.e. a value-gain of some $53 million, or 15 cents per Rubicon share.
Luke Moriarty: Following the sale of Challenge and Brisbane, and completion of the recently announced $60 million share buy-back we will have cash of approximately NZ$70 million.
Luke Moriarty: In terms of our immediate major investment direction, we are first and foremost keen to ensure that the value of our existing investments is captured. So for example, we have commitments of approximately NZ$40 million to meet Rubicon's financial share of the ArborGen science programme - a not inconsiderable sum of money that we need to ensure is value-adding for shareholders and achieves a 20% hurdle rate for new investment. Similarly we see considerable opportunity with our HortResearch alliance to bring superior horticultural cultivars to market.
In terms of opportunities and high-growth, we work backwards from an hypothesis about the future - so for example, with Capstone we formed an hypothesis about the future of distributed electricity generation and sought out the technology that would meet the way we saw the world moving. In ArborGen we have taken a view about sustainable forestry and have sought out technology (in this case forestry biotechnology) to meet what we see as a future need. The same is true for our HortResearch alliance work. In the end, it is this accuracy of the hypothesis, the size of the market space, the correct selection of the technology and its commercialisation that are the key determinants of high growth. We believe that ArborGen meets all of these parameters.
Luke Moriarty: I am not going to be brave enough to predict a share price for FCF - what I will say is that Rubicon sees considerably more value than the current share price trading range of 28-30 cents per share. Most commentators believe that there is upside in FCF from product price improvement, resolution of the Central North Island Forest Partnership issue, and "clearing" of the recent rights issue - we would agree with that type of commentary.
Luke Moriarty: Rubicon took part in the re-capitalisation of Fletcher Challenge Forests that occurred last year - again, as part of the restructuring of the Fletcher Challenge Group, where Rubicon acted as a facilitator of the FCL separation process. Out of that restructuring and FCF re-capitalisation process, Rubicon acquired FCF shares under both a placement and an underwrite obligation. Rubicon holds approximately 492 million FCF shares (17.6% of FCF).
Luke Moriarty: We do see upside in the FCF shareholding - but the decision at that time was based on even simpler maths than that - we would have been required to put our FCF shares to Fletcher Building at 25 cents (the underwrite price), when the FCF share price was trading at 30-35 cents - so, Rubicon shareholders would have lost out on a considerable amount of value had we decided to put the shares to Building.
Luke Moriarty: Trees & Technology does place a lot of reliance on FCF and CNIFP because these 2 customers combined make up some 10% of the NZ market. But it is also targeting other major NZ forest growers, and in addition, has growth plans into both Australia and South America (where it is already has customers in Chile and Argentina).
Luke Moriarty: Rubicon is not, nor was it ever intended to be, a cash generator from day 1 - instead, the objective was to realize cash from non-core investments in order to take the company forward. In terms of our existing portfolio, the greatest market opportunity rests with our ArborGen investment, whereas the closer-to-market opportunities probably lie in generating clonal forestry activities in South America and bringing the HortResearch alliance to a marketable product(s) - but neither of these are immediate events.
Both Forestadora Tapebicua and our Trees & Technology business are cash generators today.
Luke Moriarty: No - ArborGen is not yet making money - it is still in the development phase of its life-cycle, and is currently focusing on the development of three bio-engineered tree- traits, in three species and in three geographies - Lignin reduction, growth and herbicide tolerance, in Radiata, Eucalyptus and Loblolly, in the US south, Australasia and South America. These traits represent some of the largest value-generators to the growers, processors and end-users of wood fibre, and the three species / geographies allow ArborGen to target over 50% of the world's plantation forestry market.
Luke Moriarty: The focus is foremost to bring value to our existing investments - ArborGen, Trees & Technology, FTSA, FCF shareholding and our alliance with HortResearch - before we look to further new opportunities.
New opportunities will be based on a philosophy of "NZ ideas, global markets," as NZ is where our competitive advantage should be.
Luke Moriarty: I don't quite understand the thrust of the question, so I will go back to basics with this one.
Rubicon should be seen as the "commercialiser of innovation" - the party that brings together all aspects of the business model needed to commercialise new technology - be it the preparation of business plans, finding new funding, bringing together collaborative business partnerships, protecting intellectual property, or establishing a path to market.
The exact role Rubicon will play in each situation will be case-dependent. So, in come cases we may provide some unique market insight (e.g. Capstone); in another we may provide enabling alliances / relationships (e.g. HortResearch); or we may contribute existing assets or capabilities (e.g. ArborGen and HortResearch). In all cases, the provision of funding will never be sufficient reason alone for Rubicon to invest.
Luke Moriarty: In short, the more intense the market conditions are for participants in the industry, the more likely they will seize any opportunity that gives them a competitive advantage - we strongly believe that ArborGen will give them that advantage through the provision of superior bio-engineered treestocks - treestocks that give the grower advantages in the planting and maintenance of the forest estate (e.g. herbicide tolerance), the processor advantages in the cutting and processing of the trees (e.g. no splitting), and the end-user in that they will receive improved wood-fibre properties (e.g. increased wood density) .
The other point to note is that like all resource-based businesses, forestry is cyclical. One could well have asked the same question in relation to the oil and gas industry - 24 months ago we had US$10 per barrel of oil with commentators saying we were heading for US$5 per barrel. As we know, the price then raced to US$35+ before settling to around US$25 today.
Luke Moriarty: There is no doubt that it is a challenge - but I do believe we can bring considerable value to Rubicon shareholders from these "bits and pieces." Already we have announced the sales of Brisbane and Challenge for a total of NZ$73 million. This is some NZ$53 million (or 15 cents per Rubicon share) more than their acquisition cost only 3 months ago, and at least 2-3 times average analysts valuation of these assets. So I think we have convinced shareholders that we know how to transact and extract value from these assets.
In addition, the fact that we have announced a share buy-back should be considered as a strong signal that we wish to address our current market share-price discount to NTA before we will consider any major new investment.
Luke Moriarty: Rubicon acquired an investment in FTSA (see below), FCF's biotechnology assets (including a 2.95% investment in Genesis) for NZ$80 million, again as part of the Fletcher Challenge restructuring process and the formation of Rubicon - these assets were acquired as a total package and the price was not allocated to specific assets at that time of acquisition.
We have had a long association with Genesis - Genesis was our partner in the sequencing of the jointly owned DNA database in Radiata and Eucalyptus. We have not yet addressed our current position in Genesis, other than to say that we see more value than the $3.85 per share at which it is trading today.
Luke Moriarty: All of the above - value in the short term from asset realization, value in the medium term from growth in value of FCF shares, and value long term in assets such as ArborGen.
Luke Moriarty: Forestadora Tapebicua (FTSA) is a research and development investment in Argentina, that FCF made, to determine whether Eucaluptus grandis could be grown and processed for solid-wood purposes. Much of the hard work has now been completed, and we are of the strong view that we can grow and process Grandis for solid-wood applications, and that we are market leaders in that technology. However, the market, particularly in the US, is still in the early stages of development and we are currently restricted to selling the product into a very poor domestic Argentine economy - so FTSA today is operating cash positive, but not as much as we would like to see.
From a Rubicon perspective, we now need to move beyond our current position and answer the question as to how we leverage our existing FTSA research & development knowledge into value for Rubicon shareholders in the future - something we are currently addressing.
Luke Moriarty: We have met with most of our largest investors - they are comfortable with our short and medium term objectives (refer below), are very pleased with the disposal prices achieved for Brisbane and Challenge! and the recently announced share $60 million share buy-back intention - all of which indicate a single focus on shareholder value.
Luke Moriarty: Our immediate short-medium term objectives are clear - realise cash from the sale of our non-core investments, bring value to our FFS shareholding, maximize the value of our existing activities (e.g. our clonal-treebreeding activities at TeTeko), creating value from the commercialization of ArborGen and our alliance with HortResearch, and closing the current market share price discount to NTA through the use of sound capital/investment practices (e.g. the $60 million share buy-back already announced).
The reality is, that until we have closed the value-gap we do not have the right to grow the company aggressively through re-investment in new opportunities.
ShareChat thanks Luke Moriarty for taking part in this Investor Interview.
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